The Nifty is likely to trade in the broad range of 6,000-6,500 until May 2014, Girish Pai, Director, Claritas Research said. The key even market is closely watching is general elections, and the possibility of a hung parliament seems higher now than it was a month back, he told CNBC-TV18 in an interview.
On specific stocks, he is bullish on export-oriented sectors like pharma and IT. He prefers betting on Infosys versus TCS despite the run-up seen in the former.
Further, Pai is not too bullish on midcap stocks and prefers sticking to largecaps.
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Below is the edited transcript of Girish Pai’s interview with CNBC-TV18
Q: What is your take on the US jobs data and the way markets have reacted? Do you think the market is running a bit ahead of itself in terms of what it means for tapering or is the cue that the market was looking for?
A: There has been a bunching of positive events and news coming through over the weekend. Yes the nonfarm payroll number was one positive coming in substantially below what market was expecting and therefore the yields coming of in the US has impacted positively with the emerging market equities.
In the Indian context, the divestment in terms of secondary market paper coming through, would have impacted flows into the secondary market, that has kind of got pushed back with the moves that government is making in terms of either cross holding, higher special dividends or buyback by say Coal India limited for instance. That is leading to some kind of positivity.
The third aspect is regarding interest rates with the yields falling in the US and the IIP data that has come out last week was a pretty negative number versus expectations. The view now is that RBI is going to push back any kind of tightening and we have had a positive start to the earning season from Infosys for instance. Until May 2014, the market is going to trade in the range of 6000-6500. I don't see it breaking out because the key event that the market is looking out is election in May 2014. The odds of a hung parliament are a little bit more now than they were a month back.
There seems to be a kind of mood of comparative populism building up after what Aam Aadmi Party (AAP) has done in Delhi. We do see pockets, people demanding lower LCD prices in Maharashtra, plus there are water bills, there is taxation related issues, which have been discussed by various political parties. It is a pretty negative picture that I see from the larger national angle. To that extent, we are probably going to go back to 6,000 levels rather than to 6,500 levels.
Q: Ranbaxy has fallen off a cliff today down 7 percent, your thoughts on Ranbaxy?
A: I don't track that stock very closely. The pharma sector is benefitting from a pretty steady growth. Domestic market has been slightly slower versus overseas markets. It is also benefitting from the 14 percent depreciation in the Indian rupee vis-à-vis the US dollar. That is leading to the pretty good performance in the pharma sector from an earnings perspective. Market is positively inclined to it because there is sectoral rotation, money is going away from domestic cyclicals like banking and capital goods and infrastructure back into these export oriented sectors.
Q: How did you read Infosys numbers and the kind of stock move that we have seen and can it move towards Rs 4000 and thereby bridge some more gap between itself and TCS or you think even Tata Consultancy Services (TCS) will outperform?
A: Since Narayan Murthy has come in, we have seen a P/E multiple discount contraction between Infosys and TCS. At one point in time, it traded at 13-14 P/E multiple versus TCS 19-20. Now that gap has got bridged a bit, also reflects that the market is anticipating certain things to happen in Infosys. One is that the revenue growth has to pickup or has already picked up. It is expecting that somewhere down the road, Infosys will be trading in line or grow in-line with TCS. It may be even take a leadership role, which it used to have in the past.
This is possible considering the fact that Infosys has said that 25 percent EBIT margin is what it is looking at versus 27 percent medium term target that TCS has got. This means that it can reinvest a lot of whatever it gains from cost optimization measures that it is going to take from here on to drive its sales and marketing and to drive better productivity. May be 12-18 months down the road, there should be a pretty substantial pickup in growth, which should make it at least close to the industry leader at that point in time.
For TCS, margins have kind of maxed out, they are only going to come off from here. I would prefer Infosys versus TCS even at this point in time despite the run-up that we have seen in Infosys.
Q: What about the broader markets? Do you have any stocks that you like from that space which might be outperformers in 2014?
A: I don't want to get into midcap space at this point in time. While there has been a substantial run-up in the last few months because the market has been trending positively and there is this hope of a decisive mandate, which will lead to lot of measures by the new government to set the economy back on track. But there is a question mark on that.
Also, we have seen NFO come through and there are few in the pipeline- the midcap NFOs from the mutual fund industry. That is what has kept the midcap stocks up. But I wouldn’t want to look at that considering the scenario that is panning out on the political front. I would rather still continue to bet on the large caps. I would be neutral vis-à-vis the index and pick stocks which I think are going to outperform their peers within the particular sectors that we are looking at.
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